Invest in Highly Rated Socially Responsible Companies

(Note: First in a series of environmental, social and governance (ESG) ETFs)

The iShares ESG MSCI U.S.A. ETF (ESGU) tracks an index composed of U.S. companies that have been selected and weighted for positive environmental, social and governance (ESG) characteristics.

ESGU invests in companies with strong ESG traits, while maintaining an overall market-like portfolio. Companies in the broad MSCI USA Index are rated on risk factors related to environmental (carbon emissions, water use and toxic waste), social (health and safety, labor management and sourcing) and governance issues (corruption, fraud and anti-competitive practices).

Portfolio optimization software is used to maximize the fund’s stake in highly rated companies, while also staying true to market-like exposure. In addition, the fund completely excludes tobacco companies, producers of certain weapons (landmines and bioweapons) and companies embroiled in “severe business controversies.”

The fund is competitively priced for its exposure. However, a distinct lack of interest from investors can make the fund difficult to trade at the retail level and significantly raises the risk of closure. Prior to June 1, 2018, the fund tracked the MSCI USA ESG Focus Index.

Although the risk involved with ESGU might deter some investors, you can see its general positive uptrend, aside from late 2019 and March 2020, in the chart below.

The fund’s top five holdings are in Apple (NASDAQ:APPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOGL). Each of those holdings accounts for less than 6% in the portfolio. Its top sectors are technology (32.51%), health care (14.97%), consumer cyclicals (12.69%), financials (12%) and industrials (8.58%).

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Investors who want exposure to higher-rated environmental, social and governance companies, while accessing large- and mid-cap U.S. stocks, may want to consider this fund. ESGU seeks similar risk and return to the MSCI USA Index, while achieving a more sustainable outcome.

It can be used as a sustainable building block for the core of your portfolio at a low cost. However, I urge all potential investors to conduct their own due diligence in deciding whether or not this fund fits their own individual portfolio goals.

Jim Woods

Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. Jim is the editor of Successful Investing, the Bullseye Stock Trader, and The Deep Woods (formerly the Weekly ETF Report). His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, Human Events and many others. Jim formerly worked with Investor’s Business Daily founder William J. O’Neil, helping to author training courses in the CANSLIM stock-picking methodology. The independent firm TipRanks rates Jim the No. 3 financial blogger in the world (out of more than 6,000). TipRanks calculates that, since 2012, he's made 361 successful recommendations out of 499 total, earning a success rate of 72% and a +15.3% average return per recommendation. He is known in professional and personal circles as “The Renaissance Man,” because his expertise includes such varied fields as composing and performing music; Western horsemanship, combat marksmanship, martial arts, auto racing and bodybuilding. Jim holds a BA in philosophy from the University of California, Los Angeles, and is a former U.S. Army paratrooper. A self-described “radical for capitalism,” he celebrates the virtue of making money from his Southern California horse ranch.